Why the RBA left rates steady

Update Borrowers have been given a reprieve, with the Reserve Bank surprising pundits by leaving interest rates on hold - for now.

The central bank cited excessive hikes by major banks as one of the reasons for holding back. The market had been strongly tipping a quarter-percentage point rise - and the RBA's statement today suggests more rate rises in future. (Read Michael Pascoe's analysis.)

The RBA left its key cash rate unchanged at 3.75 per cent after its monthly board meeting. The outcome snaps a run of three consecutive monthly increases that began in October, and added as much as $185 to a typical $300,000 home loan.

The dollar dived more than 1 US cent when the rates verdict was announced, falling to about 87.9 US cents in recent trading. Stocks, though, added to earlier gains, to end the day about 1.8 per cent higher.

JPMorgan chief economist Stephen Walters said it was "a big surprise'' that the RBA left rates unchanged, with China's efforts to slow its economy part of the reason for staying put.

"I think they're taking a tactical move to wait and see what's going to happen over the next few months, and what the impact of the earlier rate hikes will be," he told Reuters.

Even with today's pause, though, analysts expect the central bank will soon resume its series of rate rises as the economy recovers from last year's trough.

But the market is now pricing in a more-bearable rise of 80 basis points by this time next year. Before today's announcement, the expectation was that rates would be 103 basis points higher - or 4.75 per cent - by next February.

RBA governor Glenn Stevens cited the recent extra rate increases tacked on by commercial banks as a reason for leaving rates on hold this month.

"Lenders have generally raised rates a little more than the cash rate over recent months and most loan rates have risen by close to a percentage point,'' Mr Stevens in a statement accompanying the rates decision. "Since information about the early impact of those changes is still limited, the Board judged it appropriate to hold a steady setting of monetary policy for the time being.''

In December, three of the big four banks raised their variable lending rates by 35-45 basis points, more than the RBA's 25-point increase. NAB was the only one of the big four to match the RBA's increase.

The federal government welcomed the Reserve Bank's decision to leave rates unchanged. "Today's decision means a family with a $300,000 mortgage are still paying around $600 less than they were paying 18 months ago," Treasurer Wayne Swan told parliament.

Temporary pause

Still, Mr Stevens made it clear that he expects further rate increases to come.

"Interest rates to most borrowers nonetheless remain lower than average,'' he said. "If economic conditions evolve broadly as expected, the Board considers it likely that monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium term.''

Warren Hogan, head of Australian economics at ANZ, said the pause is likely to be temporary.

"I don't think this fundamentally changes the outlook for interest rates, which is for them to move higher,'' Mr Hogan told Reuters. "We still think they'll get to 4.75 (per cent by the end of the year). I think they'll go (for an increase) next month.''

Not surprisingly, the central bank's decision drew applause from the retail sector.

''Retail trade has been very patchy for the past twelve months but the hold on any interest rate rises will give retailers some breathing space and a fair go at getting back onto their feet through solid, consistent growth outside of the traditionally higher trading figures of the festive season,'' said Russell Zimmerman, executive director of the Australian Retailers Association, in a statement.

Retail sales figures for December are due out on Thursday, and will provide the next key gauge of the recovery's strength.

Global view

Mr Stevens was generally upbeat about the economy's prospects, noting conditions ''have been stronger than expected, after a mild downturn a year ago.''

While the effects of government cash handouts ''have now faded,'' household finances are being supported by a recovery in the jobs market and net worth, he said.

Shoring up growth in the economy are public spending on infrastructure, investment in the resources sector and an upturn in housing construction, the RBA said.

Significantly, Mr Steven said ''inflation is expected to be consistent with the target in 2010,'' with a strong dollar among the factors helping to keep a lid on prices.

At home, the general picture remains positive, although ''credit conditions remain difficult for many smaller businesses,'' he said.

Abroad, the picture is more mixed, with the pace of expansion likely to be ''modest'' in many economies as they repair damage from the global financial crisis.

In Asia, home to many of Australia's major export markets, the recovery has been much quicker. Indeed, China is now looking to reduce the level of its stimulus, Mr Stevens noted.

Australia was the only rich economy to avoid shrinking last year, with more than 135,000 jobs added in the final four months of last year. House prices - an issue that the RBA watches closely - are also accelerating, with national costs jumping 5.2 per cent in the final three months of 2009, the fastest pace since 2003.

Still, not all the readings are bullish, including today's NAB monthly business survey which showed a drop in confidence. ANZ survey of job advertisements, out yesterday, also reported a drop last month.

BusinessDay

31 comments

good news.

Commenter

frank

Location

north ryde

Date and time

February 02, 2010, 2:01PM

Wow! Every economist said that the rates were definitely going up! :)

Commenter

no-higher-taxes

Location

melbourne

Date and time

February 02, 2010, 2:04PM

do the 20/20 economists surveyed by Bloomberg (and i think CNBC ) who got this call 100% WRONG now lose their jobs??..why not????!!
proof if any more was needed these guys really have no clue, most over paid "guessers" in the world

Commenter

keyzeekey

Date and time

February 02, 2010, 2:09PM

The reserve bank seems to be more interested in proving pundits wrong - so no one can second guess them that to take charge of the economy. These are the idiots who raised rates aggreesively, then had to drop them aggressively. Now since the market is dioing what they wont do, they are rolling over to the big banks and saying you do what we should be doing. ie raising rates. So much for taking charge. What are we paying these clowns for. they have no idea. Stevens has got to be the most incompetent RB governor ever

Commenter

P Brown

Location

Sydney

Date and time

February 02, 2010, 2:10PM

Most people I know are struggling as they have for the past decade or more. Recovery? What recovery?

Commenter

Max Gross

Location

Yarra Ranges

Date and time

February 02, 2010, 2:11PM

"Australia was the only rich economy to avoid shrinking last year"

At the cost of Rudd wasting billions of the taxpayers surplus for $900 hand-outs (spent on rubbish like large flat screen tvs) of which was also received by non-residents, prisoners & deceased persons estates.

Commenter

no-higher-taxes

Location

melbourne

Date and time

February 02, 2010, 2:11PM

Disappointing outcome from the RBA, which has been trying to ease the brakes on slowly.

This only means when inflation really gets out of control and the bubble inflates further the brakes will have to come on harder, faster, precipitating the debt/property crash that you would have to be blind freddie to deny.

Commenter

Mike L

Date and time

February 02, 2010, 2:12PM

And just 2 hours ago I read that Centrebet did not take bets as the rate rise was "as close to a guaranteed certainty as possible". Whoops.

Commenter

Simon

Location

Canberra

Date and time

February 02, 2010, 2:14PM

DAMN! I was hoping for better returns on my savings.

Commenter

Saver

Location

Sydney

Date and time

February 02, 2010, 2:18PM

....and even with no RBA rise, Westpac announces their own rate rise due to opertaing costs in 3...2....